Tuesday, May 5, 2015

Australia cuts rate 25 bps to boost demand, no guidance

Australia's central bank cut its benchmark cash rate by 25 basis points to 2.0 percent, as expected by financial markets, saying the outlook for inflation "provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand."
The Reserve Bank of Australia (RBA) has now cut rates twice this year for a total cut of 50 basis points but omitted issuing a guidance about its future intentions, signaling a neutral policy stance.
At its last meeting in March, when the RBA maintained its cash rate, it said that further easing may be appropriate to foster sustainable growth in demand and inflation.
On Friday the RBA will issue its latest monetary policy statement and tends to change rates when forecasts are changed, a sign that it is likely to again cut its inflation forecast for the current year to June from 1.25 percent, a forecast that was trimmed in February from a previous 1.5-2.5 percent.
In the first quarter of this year Australia's consumer price inflation rate dropped to 1.3 percent from 1.7 percent in the fourth quarter of 2014, well below the RBA's 2-3 percent target.
As in recent months, RBA Governor Glenn Stevens Glenn Stevens called for a further depreciation of the Australian dollar, saying "further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices."
The Australian dollar, known as the aussie, has been falling against the U.S. dollar since September 2014 though it has rebounded since mid-April after hitting around 1.32 to the U.S. dollar. Today it strengthened slightly to be trading at 1.26 from 1.27, down 3.2 percent for the year, with traders probably given the currency a lift on expectations that the RBA will hold off on further rate cuts due to the lack of policy guidance.
The RBA said latest data suggested "improved trends in household demand" and stronger growth in employment though weak investment in both mining and non-mining sectors will remain a drag on private demand and subdued public spending.
Stevens acknowledged that house prices have continued to rise strongly in Sydney - last month he described Sydney house prices as "rather exuberant" - but added that price trends were more varied in other cities and the RBA was working with other regulars to "assess and contain risks that may arise from the housing market."

The Reserve Bank of Australia issued the following statement by its governor, Glenn Stevens:

"At its meeting today, the Board decided to lower the cash rate by 25 basis points to 2.0 per cent, effective 6 May 2015.

The global economy is expanding at a moderate pace, but commodity prices have declined over the past year, in some cases sharply. These trends appear largely to reflect increased supply, including from Australia. Australia's terms of trade are falling nonetheless.

The Federal Reserve is expected to start increasing its policy rate later this year, but some other major central banks are stepping up the pace of unconventional policy measures. Hence, financial conditions remain very accommodative globally, with long-term borrowing rates for sovereigns and creditworthy private borrowers remarkably low.

In Australia, the available information suggests improved trends in household demand over the past six months and stronger growth in employment. Looking ahead, the key drag on private demand is likely to be weakness in business capital expenditure in both the mining and non-mining sectors over the coming year. Public spending is also scheduled to be subdued. The economy is therefore likely to be operating with a degree of spare capacity for some time yet. Inflation is forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.

Low interest rates are acting to support borrowing and spending, and credit is recording moderate growth overall, with stronger lending to businesses of late. Growth in lending to the housing market has been steady over recent months. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have been supported by lower long-term interest rates.

The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.

At today's meeting, the Board judged that the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand."